Conclusion: We continue view China as the safest place to be on the international equity front over the intermediate term, as Deflating the Inflation gives Chinese policymakers increased scope to support economic growth.
Virtual Portfolio Position: Long Chinese equities (CAF).
Earlier this morning, Keith added to our long position in Chinese equities which is now a little over -2% against our $22.11 cost basis (though largely a function of the MAR 29 one-time dividend of $2.04, which revalued the CAF to a close of $19.54 on the day). Looking at China irrespectively of our risk managed position, the Shanghai Composite Index is actually the world’s best performing major equity market in USD-terms since MAR 14 (+1.1%).
Evidently, the Chinese, who consume commodities such as food, energy and industrial metals to support the 81% of their GDP that is Fixed Investment and Private Consumption, enjoy Deflating of the Inflation – which was the key takeaway from our 2Q Themes: Last War: Fed Fighting, Bernanke’s Bubbles and Asymmetric Risks.
Per our MAY 7 research note titled, “A Refreshed Look Upon Our Best Ideas Across Asia & Latin America”:
“While admittedly boring, we continue view China as the safest place to be in the EM space over the intermediate term. Contrary to consensus storytelling about supply and demand for raw materials, we view incremental Deflating of the Inflation as supportive of the Chinese economy, as it will allow the PBOC, State Council and China Securities Regulatory Commission to continue to implement “fine tuning”, which are pro-growth (i.e. pro-liquidity; pro-investment) measures designed to buoy, but not dramatically stimulate, Chinese economic growth – which our models point to a critical inflection point here in 2Q12.”
Recent Chinese growth data has been supportive of our fundamental thesis (i.e. five-consecutive sequential gains in both Manufacturing and Services PMI readings through APR; growth in raw materials demand inflected positively in MAR), but not so much so that we’d recommend buying everything commodities and global equities on an Old Wall-style “China is back” narrative (Import growth slowed in MAR to a 29-month low of +5.4% YoY; APR data due out in the next 24-36 hours). Even if that were overwhelmingly the case, we wouldn’t dare make such an intellectually lazy call anyway.
Through the end of this week, we’ll receive China’s APR inflation data (10th) and then its APR economic growth data (11th). Our quantitative risk management levels, which are included in the chart below, are signaling to us that this batch of data is likely to be viewed positively – which, according to our thesis, suggests continued, but not dramatic improvement in the Chinese economy.